NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
(DOLLAR
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
NOTE 1. ORGANIZATION
Gladstone Investment Corporation (Gladstone Investment) was incorporated under the General Corporation Law of the State of Delaware on
February 18, 2005, and completed an initial public offering on June 22, 2005. The terms the Company, we, our and us all refer to Gladstone Investment and its consolidated subsidiaries. We are
an externally advised, closed-end, non-diversified management investment company that has elected to be treated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act), and
is applying the guidance of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 946
Financial Services-Investment Companies
(ASC 946). In addition, we have elected to
be treated for tax purposes as a regulated investment company (RIC) under the Internal Revenue Code of 1986, as amended (the Code). We were established for the purpose of investing in debt and equity securities of established
private businesses in the United States (U.S.). Debt investments primarily take the form of two types of loans: secured first lien loans and secured second lien loans. Equity investments primarily take the form of preferred or common
equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established
businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to our stockholders that grow over time, and (2) provide our
stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow in value over time to permit us to sell our equity investments for capital gains. We aim
to maintain a portfolio allocation of approximately 75.0% debt investments and 25.0% equity investments, at cost.
Gladstone Business Investment, LLC
(Business Investment), a wholly-owned subsidiary of ours, was established on August 11, 2006 for the sole purpose of owning our portfolio of investments in connection with our line of credit. The financial statements of Business
Investment are consolidated with those of Gladstone Investment. We also have significant subsidiaries (as defined under Rule 1-02(w) of the U.S. Securities and Exchange Commissions (SEC) Regulation S-X) whose financial statements
are not consolidated with ours. Refer to Note 12
Unconsolidated Significant Subsidiaries
for additional information regarding our unconsolidated significant subsidiaries.
We are externally managed by Gladstone Management Corporation (the Adviser), an affiliate of ours and an SEC registered investment adviser,
pursuant to an investment advisory agreement and management agreement. Administrative services are provided by Gladstone Administration, LLC (the Administrator), an affiliate of ours and the Adviser, pursuant to an administration
agreement. Refer to Note 4
Related Transactions
for more information regarding these arrangements.
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Unaudited Interim Financial Statements and Basis of Presentation
We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial
information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of SEC Regulation S-X under the Securities Exchange Act of 1934, as amended. Accordingly, we have not included in this quarterly report all of
the information and notes required by GAAP for annual financial statements. The accompanying
Consolidated Financial Statements
include our accounts and those of our wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. In accordance with Article 6 of Regulation S-X, under the Securities Act of 1933, we do not consolidate portfolio company investments. Under the investment company rules and regulations pursuant to the
American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC
946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. In our opinion, all adjustments, consisting solely of normal recurring
accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three months ended June 30, 2016 are not necessarily indicative of results that ultimately may be
achieved for the year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended March 31, 2016, as
filed with the SEC on May 17, 2016.
14
Use of Estimates
Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in our accompanying Consolidated
Financial Statements and accompanying notes. Actual results may differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
In April 2015, the FASB issued Accounting Standards Update 2015-03,
Simplifying the Presentation of Debt Issuance Costs
(ASU
2015-03), which simplifies the presentation of debt issuance costs. ASU 2015-03 requires the presentation of debt issuance costs as a deduction from the carrying amount of the related debt liability instead of as a deferred financing cost
asset on the balance sheet. In August 2015, the FASB issued Accounting Standards Update 2015-15,
Interest Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with
Line-of-Credit Arrangements
(ASU 2015-15), which codifies an SEC staff announcement that entities are permitted to defer and present debt issuance costs related to line of credit arrangements as assets. ASU 2015-03 was
effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, and we adopted ASU 2015-03 during the three months ended June 30, 2016. ASU 2015-15 was effective immediately and we opted to
continue to present debt issuance costs related to line of credit arrangements as assets.
As of June 30, 2016 and March 31, 2016, we had
unamortized deferred financing costs related to our mandatorily redeemable preferred stock of $3.0 million and $3.2 million, respectively. These costs have been reclassified from Deferred financing costs, net, to Mandatorily redeemable preferred
stock, net. All periods presented have been retrospectively adjusted.
The following table summarizes the retrospective adjustment and the overall impact
on the previously reported consolidated financial statements:
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|
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|
|
|
|
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March 31, 2016
|
|
|
|
As Previously
Reported
|
|
|
Retrospective
Application
|
|
Deferred financing costs, net
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|
$
|
4,332
|
|
|
$
|
1,147
|
|
Mandatorily redeemable preferred stock, net
|
|
|
121,650
|
|
|
|
118,465
|
|
Investment Valuation Policy
Accounting Recognition
We record our investments at fair
value in accordance with the FASB ASC Topic 820,
Fair Value Measurements and Disclosures
(ASC 820) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains or losses are measured by the
difference between the net proceeds from the repayment or sale and amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of
recoveries. Unrealized appreciation or depreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
Board Responsibility
In accordance with the 1940 Act,
our Board of Directors has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our investments based on our investment valuation policy (which has been approved by our Board of Directors) (the
Policy). Such review occurs in three phases. First, prior to its quarterly meetings, the Board of Directors receives written valuation recommendations and supporting materials provided by professionals of the Adviser and Administrator
with oversight and direction from our chief valuation officer (the Valuation Team). Second, the Valuation Committee of our Board of Directors (comprised entirely of independent directors) meets to review the valuation recommendations and
supporting materials. Third, after the Valuation Committee concludes its meeting, it and the chief valuation officer present the Valuation Committees findings to the entire Board of Directors so that the full Board of Directors may review and
approve the fair value of our investments in accordance with the Policy.
There is no single standard for determining fair value (especially for
privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by the chief valuation officer, uses the Policy and
each quarter the Valuation Committee and Board of Directors review the Policy to determine if changes thereto are advisable and also review whether the Valuation Team has applied the Policy consistently.
15
Use of Third Party Valuation Firms
The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments.
Standard & Poors Securities Evaluation, Inc. (SPSE), a valuation specialist, provides estimates of fair value on our debt
investments. The Valuation Team generally assigns SPSEs estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates SPSEs
estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Teams estimate of value on a specific debt investment may significantly differ from SPSEs. When this occurs, our Valuation Committee and
Board of Directors review whether the Valuation Team has followed the Policy and whether the Valuation Teams recommended fair value is reasonable in light of the Policy and other facts and circumstances and then votes to accept or reject the
Valuation Teams recommended fair value.
We may engage other independent valuation firms to provide earnings multiple ranges, as well as other
information, and evaluate such information for incorporation into the total enterprise value of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review our valuation of our
significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our total enterprise value, including review of all inputs provided by the independent
valuation firm. The Valuation Team then makes a recommendation to our Valuation Committee and Board of Directors as to the fair value. Our Board of Directors reviews the recommended fair value, whether it is reasonable in light of the
Policy, as well as other relevant facts and circumstances and then votes to accept or reject the Valuation Teams recommended fair value.
Valuation Techniques
In accordance with ASC 820, the
Valuation Team uses the following techniques when valuing our investment portfolio:
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Total Enterprise Value
In determining the fair value using a total enterprise value (TEV), the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of
the following factors: the portfolio companys ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected twelve month revenue or earnings before interest, taxes,
depreciation and amortization (EBITDA)); EBITDA or revenue multiples obtained from our indexing methodology whereby the original transaction EBITDA or revenue multiple at the time of our closing is indexed to a general subset of
comparable disclosed transactions and EBITDA or revenue multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, and other pertinent factors. The
Valuation Team generally reviews industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team then generally allocates the TEV to the portfolio companys
securities in order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt
investments.
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TEV is primarily calculated using EBITDA or revenue multiples; however, TEV may also be calculated using a
discounted cash flow (DCF) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for
nonperformance and liquidity risks. Generally, the Valuation Team uses the DCF to calculate TEV to corroborate estimates of value for our equity investments where we do not have the ability to effectuate a sale of a portfolio company or for debt of
credit impaired portfolio companies.
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|
Yield Analysis
The Valuation Team generally determines the fair value of our debt investments using the yield analysis, which includes a DCF calculation and the Valuation Teams own assumptions,
including, but not limited to, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including, among other things, increased
probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by SPSE and market quotes.
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Market Quotes
For our investments for which a limited market exists, we generally base fair value on readily available and reliable market quotations, which are corroborated by the Valuation Team
(generally by using the yield analysis explained above). In addition, the Valuation Team assesses trading activity for similar investments and evaluates variances in quotations and other market insights to determine if any available quoted prices
are reliable. Typically, the Valuation Team uses the lower indicative bid price (IBP) in the bid-to-ask price range obtained from the respective originating syndication agents trading desk on or near the valuation date. The
Valuation Team may take further steps to consider additional information to validate that price in accordance with the Policy.
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16
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Investments in Funds
For equity investments in other funds, where we cannot effectuate a sale, the Valuation Team generally determines the fair value of our uninvested capital at par value and of our
invested capital at the Net Asset Value (NAV) provided by the fund. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity.
|
In addition to the valuation techniques listed above, the Valuation Team may also consider other factors when determining the fair value of our investments,
including but not limited to: the nature and realizable value of the collateral, including external parties guaranties; any relevant offers or letters of intent to acquire the portfolio company; and the markets in which the portfolio company
operates. If applicable, new and follow-on debt and equity investments made during the current reporting quarter are generally valued at our original cost basis.
Fair value measurements of our investments may involve subjective judgments and estimates and, due to the uncertainty inherent in valuing these securities,
the Advisers determinations of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if the
Advisers determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities. Additionally, changes in the market environment and other events that
may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions
on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.
Refer to Note 3
Investments
for additional information regarding fair value measurements and our application of ASC 820.
Revenue Recognition
Interest Income Recognition
Interest income, adjusted for amortization of premiums, amendment fees and acquisition costs and the accretion of discounts, is recorded on the
accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we
will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest.
Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon managements judgment. Generally, non-accrual loans are restored to accrual status when past-due principal and interest are
paid, and, in managements judgment, are likely to remain current, or due to a restructuring, the interest income is deemed to be collectible. As of June 30 and March 31, 2016 our loan to Tread Corporation (Tread) was on
non-accrual status, with an aggregate debt cost basis of $3.2 million and $1.4 million, or 0.9% and 0.4% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $2.0 million and $1.4 million, or 0.6% and 0.4% of
the fair value of all debt investments in our portfolio, respectively.
Paid-in-kind (PIK) interest, computed at the contractual rate
specified in the loan agreement, is added to the principal balance of the loan and recorded as interest income over the life of the obligation. As of June 30 and March 31, 2016, we did not have any loans with a PIK interest component.
During the three months ended June 30, 2016 and 2015, we did not record any PIK income, nor did we collect any PIK interest in cash.
Other Income
Recognition
We record success fee income when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a
change of control in a portfolio company, typically from an exit or sale. We did not record any success fee income during the three months ended June 30, 2016. During the three months ended June 30, 2015, we recorded success fee income of
$0.9 million.
We accrue dividend income on preferred and common equity securities of our portfolio companies to the extent that such amounts are expected
to be collected and if we have the option to collect such amounts in cash or other consideration. During the three months ended June 30, 2016 and 2015, we recorded dividend income of $2.8 million and $0.4 million, respectively.
Both success fee and dividend income are recorded in other income in our accompanying
Consolidated Statements of Operations
.
17
Deferred Financing and Offering Costs
Deferred financing and offering costs consist of costs incurred to obtain financing, including lender fees and legal fees. Certain costs associated with our
revolving line of credit are deferred and amortized using the straight-line method, which approximates the effective interest method, over the term of the revolving line of credit. Costs associated with the issuance of our mandatorily redeemable
preferred stock are presented as discounts to the liquidation value of the mandatorily redeemable preferred stock and are amortized using the straight-line method, which approximates the effective interest method, over the terms of the respective
financings. See Note 5
Borrowings
and Note 6
Mandatorily Redeemable Preferred Stock
for further discussion.
Related Party
Fees
We have entered into an investment advisory and management agreement (the Advisory Agreement) with the Adviser, which is owned and
controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an incentive fee. Additionally, we pay the Adviser a
loan servicing fee as compensation for its services as servicer under the terms of our Fifth Amended and Restated Credit Agreement dated April 30, 2013, as amended (our Credit Facility).
We have entered into an administration agreement (the Administration Agreement) with the Administrator, which is owned and controlled by our
chairman and chief executive officer, whereby we pay separately for administrative services. These fees are accrued when the services are performed and generally paid one month in arrears.
Refer to Note 4
Related Party Transactions
for additional information regarding these related party fees and agreements.
Recent Accounting Pronouncements
In March 2016, the FASB
issued Accounting Standards Update 2016-06,
Contingent Put and Call Options in Debt Instruments
(ASU 2016-06), which clarifies the requirements for assessing whether contingent call (put) options that can accelerate
the payment of principal on debt instruments are clearly and closely related. We are currently assessing the impact of ASU 2016-06 and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU
2016-06 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted.
In January 2016, the FASB issued Accounting Standards Update 2016-01,
Financial InstrumentsOverall: Recognition and Measurement of Financial
Assets and Financial Liabilities
(ASU 2016-01), which changes how entities measure certain equity investments and how entities present changes in the fair value of financial liabilities measured under the fair value option that
are attributable to instrument-specific credit risk. We are currently assessing the impact of ASU 2016-01 and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU 2016-01 is effective for annual
reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted for certain aspects of ASU 2016-01 relating to the recognition of changes in fair value of financial
liabilities when the fair value option is elected.
In May 2015, the FASB issued Accounting Standards Update 2015-07,
Disclosures for Investments
in Certain Entities That Calculate Net Asset Value Per Share (or its Equivalent)
(ASU 2015-07), which eliminates the requirement to categorize investments in the fair value hierarchy if their fair value is measured at net asset
value per share (or its equivalent) using the practical expedient in the FASBs fair value measurement guidance. The adoption of ASU 2015-07 did not have a material impact on our financial position, results of operations or cash flows from
adopting this standard. ASU 2015-07 is required to be adopted retrospectively and is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, and we adopted ASU 2015-07 effective
April 1, 2016.
In February 2015, the FASB issued Accounting Standards Update 2015-02,
Amendments to the Consolidation Analysis
(ASU 2015-02), which amends or supersedes the scope and consolidation guidance under existing GAAP. The adoption of ASU-2015-02 did not have a material impact on our financial position, results of operations or cash flows. ASU 2015-02 is
effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, and we adopted ASU 2015-02 effective April 1, 2016.
In August 2014, the FASB issued Accounting Standards Update 201415,
Presentation of Financial Statements Going Concern (Subtopic 205
40): Disclosure of Uncertainties About an Entitys Ability to Continue as a Going Concern
(ASU 2014-15). ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial
doubt about the entitys ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its
18
obligations as they become due within one year after the date that the financial statements are issued. Since this guidance is primarily around certain disclosures to the financial statements, we
anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. We are currently assessing the additional disclosure requirements, if any, of ASU 2014-15. ASU 2014-15 is effective for annual periods
ending after December 31, 2016 and interim periods thereafter, with early adoption permitted.
In May 2014, the FASB issued Accounting Standards
Update 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09), as amended in March 2016 by FASB Accounting Standards Update 2016-08,
Principal versus Agent Considerations
(ASU
2016-08), in April 2016 by FASB Accounting Standards Update 2016-10,
Identifying Performance Obligations and Licensing
(ASU 2016-10), and in May 2016 by FASB Accounting Standards Update 2016-12,
Narrow-Scope Improvements and Practical Expedients
(ASU 2016-12), which supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model,
changes the basis for deciding when revenue is recognized over time or at a point in time and will expand disclosures about revenue. We are currently assessing the impact of ASU 2014-09, as amended, and do not anticipate a material impact on our
financial position, results of operations or cash flows from adopting this standard. In July 2015, the FASB issued Accounting Standards Update 2015-14,
Deferral of the Effective Date,
which deferred the effective date of ASU
2014-09. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, and ASU 2016-12, is now effective for annual reporting periods beginning after December 15, 2017 and interim periods within those years, with early adoption permitted
for annual reporting periods beginning after December 15, 2016 and interim periods within those years.
NOTE 3. INVESTMENTS
Fair Value
In accordance with ASC 820, our
investments fair value is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition
focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for
fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.
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Level 1
inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets;
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Level 2
inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, either
directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices
vary substantially over time or among brokered market makers; and
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Level 3
inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use
when pricing the financial instrument and can include the Valuation Teams assumptions based upon the best available information.
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When
a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial
instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or, components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair
value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.
As of June 30, 2016 and
March 31, 2016, all of our investments were valued using Level 3 inputs. We transfer investments in and out of Level 1, 2 and 3 securities as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs
utilized to perform the valuation for the period. During the three months ended June 30, 2016 and 2015, there were no transfers in or out of Level 1, 2 and 3.
19
The following table presents our portfolio investments carried at fair value as of June 30, 2016 and
March 31, 2016, by caption on our accompanying
Consolidated Statements of Assets and Liabilities,
and by security type. All investments are primarily valued using Level 3 inputs within the ASC 820 fair value hierarchy:
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Total Recurring Fair
Value Measurements
|
|
|
|
Reported in
Consolidated
Statements
of Assets and
Liabilities
|
|
|
|
June 30, 2016
|
|
|
March 31, 2016
|
|
Non-Control/Non-Affiliate Investments
|
|
|
|
|
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Secured first lien debt
|
|
$
|
95,802
|
|
|
$
|
92,343
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|
Secured second lien debt
|
|
|
36,773
|
|
|
|
35,366
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|
Preferred equity
|
|
|
36,875
|
|
|
|
31,696
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|
Common equity/equivalents
|
|
|
27,036
|
|
|
|
21,528
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate Investments
|
|
|
196,486
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|
|
|
180,933
|
|
Affiliate Investments
|
|
|
|
|
|
|
|
|
Secured first lien debt
|
|
|
179,586
|
|
|
|
182,694
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|
Secured second lien debt
|
|
|
28,217
|
|
|
|
24,118
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|
Preferred equity
|
|
|
68,872
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|
|
|
81,854
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|
Common equity/equivalents
|
|
|
1
|
|
|
|
8,057
|
|
|
|
|
|
|
|
|
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Total Affiliate Investments
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|
|
276,676
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|
|
|
296,723
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|
Control Investments
|
|
|
|
|
|
|
|
|
Secured first lien debt
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|
|
5,000
|
|
|
|
5,000
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|
Secured second lien debt
|
|
|
5,000
|
|
|
|
5,000
|
|
Preferred equity
|
|
|
7,819
|
|
|
|
|
|
Common equity/equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
17,819
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|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value using Level 3 inputs
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|
$
|
490,981
|
|
|
$
|
487,656
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|
|
|
|
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|
|
|
|
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20
In accordance with the FASBs ASU No. 2011-04,
Fair Value Measurement (Topic 820): Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS)
(ASU 2011-04), the following table provides quantitative information about our
investments valued using Level 3 fair value measurements as of June 30, 2016 and March 31, 2016. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our
fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt-related calculations and on the cost basis for all equity-related calculations for the particular input.
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|
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|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
Fair Value as of
June 30, 2016
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|
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Fair Value as
of March 31,
2016
|
|
|
Valuation
Technique/
Methodology
|
|
|
Unobservable
Input
|
|
Range / Weighted
Average as of
June 30, 2016
|
|
Range / Weighted
Average as of
March 31, 2016
|
Secured first lien debt
|
|
$
|
225,461
|
|
|
$
|
238,707
|
|
|
|
TEV
|
|
|
EBITDA multiple
|
|
4.3x 8.0x / 6.2x
|
|
4.4x 8.2x / 6.3x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$1,113 - $9,444 /
$4,116
|
|
$970 - $8,713 /
$3,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
|
|
20.0% - 20.0% / 20.0%
|
|
|
|
|
|
|
|
|
|
|
54,927
|
(A)
|
|
|
41,330
|
(A)
|
|
|
Yield Analysis
|
|
|
Discount Rate
|
|
14.1% - 18.9% / 16.1%
|
|
14.2% - 17.7% / 16.4%
|
|
|
|
|
|
|
|
Secured second lien debt
|
|
|
50,517
|
(B)
|
|
|
46,418
|
(B)
|
|
|
TEV
|
|
|
EBITDA multiple
|
|
5.3x 6.1x / 5.8x
|
|
5.5x 6.2x / 5.9x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$2,767 - $5,131 / $4,564
|
|
$2,718 - $4,851 / $3,790
|
|
|
|
|
|
|
|
|
|
|
19,473
|
|
|
|
18,066
|
|
|
|
Yield Analysis
|
|
|
Discount Rate
|
|
9.9% - 19.5% /
14.8%
|
|
10.1% - 20.0% /
15.1%
|
|
|
|
|
|
|
|
Preferred equity
(C)
|
|
|
113,566
|
|
|
|
113,550
|
|
|
|
TEV
|
|
|
EBITDA multiple
|
|
4.3x 8.0x / 6.2x
|
|
4.4x 8.2x / 6.4x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$1,113 - $79,086 / $4,371
|
|
$0 - $76,487 / $3,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
20.0% - 20.0% / 20.0%
|
|
20.0% - 20.0% / 20.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue multiple
|
|
0.2x 0.3x / 0.3x
|
|
0.2x 0.5x / 0.4x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$28,065 - $57,529 / $42,800
|
|
$29,300 - $56,937 / $42,761
|
|
|
|
|
|
|
|
Common equity/equivalents
(D)
|
|
|
27,037
|
|
|
|
29,585
|
|
|
|
TEV
|
|
|
EBITDA multiple
|
|
4.3x 11.0x / 8.6x
|
|
4.4x 11.0x / 8.7x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$1,113 - $17,465 / $10,957
|
|
$0 - $76,487 / $820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
20.0% - 20.0% / 20.0%
|
|
20.0% - 20.0% / 20.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue multiple
|
|
0.2x 0.2x / 0.2x
|
|
0.2x 0.5x / 0.2x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$57,529 - $57,529
/ $57,529
|
|
$29,300 - $56,937 /
$56,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
490,981
|
|
|
$
|
487,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Fair value as of June 30, 2016 includes one new proprietary debt investment for $0.2 million, which was valued at cost, and one proprietary debt investment for $5.3 million, which was valued at the expected payoff
amount. Fair value as of March 31, 2016 includes one proprietary debt investment for $5.3 million which was valued at the expected payoff amount.
|
(B)
|
Fair value as of June 30, 2016 includes one new propriety debt investment for $18.6 million, which was valued at cost. Fair value as of March 31, 2016 includes one proprietary debt investment for $14.5
million, which was valued at the expected payoff amount.
|
(C)
|
Fair value as of June 30, 2016 includes one new proprietary equity investment for $6.9 million, which was valued at cost. Fair value as of March 31, 2016 includes one proprietary equity investment for $22.3
million, which was valued at the expected exit amount.
|
(D)
|
Fair value as of June 30, 2016 includes one new proprietary equity investment for $1, which was valued at cost. Fair value as of March 31, 2016 includes two proprietary equity investments for a combined $8.1
million, which were valued at the expected exit amount.
|
Fair value measurements can be sensitive to changes in one or more of the valuation
inputs. Changes in discount rates, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase/(decrease) in discount rates or a (decrease)/increase
in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a (decrease)/increase in the fair value of certain of our investments.
21
Changes in Level 3 Fair Value Measurements of Investments
The following tables provide the changes in fair value of our portfolio, broken out by security type, during the three months ended June 30, 2016 and 2015
for all investments for which the Adviser determines fair value using unobservable (Level 3) inputs.
Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
First Lien
Debt
|
|
|
Secured
Second
Lien Debt
|
|
|
Preferred
Equity
|
|
|
Common
Equity/
Equivalents
|
|
|
Total
|
|
Three months ended June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of March 31, 2016
|
|
$
|
280,037
|
|
|
$
|
64,484
|
|
|
$
|
113,550
|
|
|
$
|
29,585
|
|
|
$
|
487,656
|
|
Total gain (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain
(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,806
|
|
|
|
18,806
|
|
Net unrealized appreciation
(depreciation)
(B)
|
|
|
(1,714
|
)
|
|
|
1,406
|
|
|
|
15,604
|
|
|
|
5,007
|
|
|
|
20,303
|
|
Reversal of previously recorded appreciation upon realization
(B)
|
|
|
|
|
|
|
|
|
|
|
(14,381
|
)
|
|
|
(6,835
|
)
|
|
|
(21,216
|
)
|
New investments, repayments and
settlements
(C)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances / originations
|
|
|
2,976
|
|
|
|
18,600
|
|
|
|
6,899
|
|
|
|
501
|
|
|
|
28,976
|
|
Settlements / repayments
|
|
|
(911
|
)
|
|
|
(14,500
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,411
|
)
|
Sales
|
|
|
|
|
|
|
|
|
|
|
(8,106
|
)
|
|
|
(20,027
|
)
|
|
|
(28,133
|
)
|
Transfers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2016
|
|
$
|
280,388
|
|
|
$
|
69,990
|
|
|
$
|
113,566
|
|
|
$
|
27,037
|
|
|
$
|
490,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
First Lien
Debt
|
|
|
Secured
Second
Lien Debt
|
|
|
Preferred
Equity
|
|
|
Common
Equity/
Equivalents
|
|
|
Total
|
|
Three months ended June 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of March 31, 2015
|
|
$
|
267,545
|
|
|
$
|
65,974
|
|
|
$
|
111,090
|
|
|
$
|
21,444
|
|
|
$
|
466,053
|
|
Total gain (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain
(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215
|
|
|
|
215
|
|
Net unrealized appreciation
(depreciation)
(B)
|
|
|
3,833
|
|
|
|
(107
|
)
|
|
|
(3,589
|
)
|
|
|
3,170
|
|
|
|
3,307
|
|
Reversal of previously recorded appreciation upon realization
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110
|
)
|
|
|
(110
|
)
|
New investments, repayments and
settlements
(C)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances / originations
|
|
|
12,082
|
|
|
|
|
|
|
|
5,244
|
|
|
|
|
|
|
|
17,326
|
|
Settlements / repayments
|
|
|
(4,433
|
)
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,233
|
)
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(315
|
)
|
|
|
(315
|
)
|
Transfers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2015
|
|
$
|
279,027
|
|
|
$
|
65,067
|
|
|
$
|
112,745
|
|
|
$
|
24,404
|
|
|
$
|
481,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Included in net realized gain (loss) on investments on our accompanying
Consolidated Statements of Operations
for the respective periods ended June 30, 2016 and 2015.
|
(B)
|
Included in net unrealized appreciation (depreciation) of investments on our accompanying
Consolidated Statements of Operations
for the periods ended June 30, 2016 and 2015.
|
(C)
|
Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, PIK and other non-cash disbursements to portfolio companies, as well as decreases in the cost
basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs, and other cost-basis adjustments.
|
Investment Activity
During the three months ended
June 30, 2016, the following significant transactions occurred:
|
|
|
In April 2016, we sold our investment in Acme Cryogenics, Inc. (Acme), which resulted in dividend income of $2.8 million and a net realized gain of $18.8 million. In connection with the sale, we received net
cash proceeds of $44.6 million, including the repayment of our debt investment of $14.5 million at par and net receivables of $0.6 million, which are recorded within Other assets, net on the accompanying
Consolidated Statement of Assets and
Liabilities
.
|
|
|
|
In May 2016, we invested $25.5 million in The Mountain Corporation (The Mountain) through a combination of secured second lien debt and preferred equity. The Mountain, headquartered in Keene, New Hampshire,
is a designer and manufacturer of premium quality, bold artwear apparel serving a diverse global customer base.
|
22
Investment Concentrations
As of June 30, 2016, our investment portfolio consisted of investments in 36 portfolio companies located in 19 states across 17 different industries with
an aggregate fair value of $491.0 million, of which our investments in Counsel Press Inc. (Counsel Press), Cambridge Sound Management, Inc. (Cambridge), The Mountain, SOG Specialty Knives & Tools, LLC
(SOG), and Nth Degree, Inc. (Nth Degree), our five largest portfolio investments at fair value, collectively comprised $127.6 million, or 26.1%, of our total investment portfolio at fair value. The following table summarizes
our investments by security type as of June 30, 2016 and March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
March 31, 2016
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
Secured first lien debt
|
|
$
|
298,312
|
|
|
|
57.1
|
%
|
|
$
|
280,388
|
|
|
|
57.1
|
%
|
|
$
|
296,247
|
|
|
|
57.2
|
%
|
|
$
|
280,037
|
|
|
|
57.4
|
%
|
Secured second lien debt
|
|
|
77,078
|
|
|
|
14.8
|
|
|
|
69,990
|
|
|
|
14.3
|
|
|
|
72,978
|
|
|
|
14.1
|
|
|
|
64,484
|
|
|
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
375,390
|
|
|
|
71.9
|
|
|
|
350,378
|
|
|
|
71.4
|
|
|
|
369,225
|
|
|
|
71.3
|
|
|
|
344,521
|
|
|
|
70.6
|
|
Preferred equity
|
|
|
140,496
|
|
|
|
26.9
|
|
|
|
113,566
|
|
|
|
23.1
|
|
|
|
141,702
|
|
|
|
27.3
|
|
|
|
113,550
|
|
|
|
23.3
|
|
Common equity/equivalents
|
|
|
6,477
|
|
|
|
1.2
|
|
|
|
27,037
|
|
|
|
5.5
|
|
|
|
7,198
|
|
|
|
1.4
|
|
|
|
29,585
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity/equivalents
|
|
|
146,973
|
|
|
|
28.1
|
|
|
|
140,603
|
|
|
|
28.6
|
|
|
|
148,900
|
|
|
|
28.7
|
|
|
|
143,135
|
|
|
|
29.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
522,363
|
|
|
|
100.0
|
%
|
|
$
|
490,981
|
|
|
|
100.0
|
%
|
|
$
|
518,125
|
|
|
|
100.0
|
%
|
|
$
|
487,656
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments at fair value consisted of the following industry classifications as of June 30, 2016 and March 31,
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
March 31, 2016
|
|
|
|
Fair Value
|
|
|
Percentage
of Total
Investments
|
|
|
Fair Value
|
|
|
Percentage
of Total
Investments
|
|
Home and Office Furnishings, Housewares, and Durable Consumer Products
|
|
$
|
87,454
|
|
|
|
17.8
|
%
|
|
$
|
86,811
|
|
|
|
17.8
|
%
|
Diversified/Conglomerate Manufacturing
|
|
|
62,836
|
|
|
|
12.8
|
|
|
|
64,986
|
|
|
|
13.3
|
|
Diversified/Conglomerate Service
|
|
|
52,603
|
|
|
|
10.7
|
|
|
|
49,901
|
|
|
|
10.2
|
|
Chemicals, Plastics, and Rubber
|
|
|
48,520
|
|
|
|
9.9
|
|
|
|
90,602
|
|
|
|
18.6
|
|
Leisure, Amusement, Motion Pictures, Entertainment
|
|
|
41,084
|
|
|
|
8.4
|
|
|
|
43,330
|
|
|
|
8.9
|
|
Personal and Non-Durable Consumer Products (Manufacturing Only)
|
|
|
25,826
|
|
|
|
5.3
|
|
|
|
315
|
|
|
|
0.1
|
|
Automobile
|
|
|
25,329
|
|
|
|
5.2
|
|
|
|
24,402
|
|
|
|
5.0
|
|
Farming and Agriculture
|
|
|
23,971
|
|
|
|
4.9
|
|
|
|
21,005
|
|
|
|
4.3
|
|
Containers, Packaging, and Glass
|
|
|
21,227
|
|
|
|
4.3
|
|
|
|
20,108
|
|
|
|
4.1
|
|
Machinery (Non-agriculture, Non-construction, Non-electronic)
|
|
|
19,957
|
|
|
|
4.1
|
|
|
|
20,011
|
|
|
|
4.1
|
|
Aerospace and Defense
|
|
|
17,819
|
|
|
|
3.6
|
|
|
|
10,000
|
|
|
|
2.1
|
|
Cargo Transport
|
|
|
15,065
|
|
|
|
3.1
|
|
|
|
14,484
|
|
|
|
3.0
|
|
Beverage, Food and Tobacco
|
|
|
14,132
|
|
|
|
2.9
|
|
|
|
9,050
|
|
|
|
1.8
|
|
Textiles and Leather
|
|
|
13,904
|
|
|
|
2.8
|
|
|
|
11,995
|
|
|
|
2.5
|
|
Telecommunications
|
|
|
13,230
|
|
|
|
2.6
|
|
|
|
14,000
|
|
|
|
2.9
|
|
Other < 2.0%
|
|
|
8,024
|
|
|
|
1.6
|
|
|
|
6,656
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
490,981
|
|
|
|
100.0
|
%
|
|
$
|
487,656
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments at fair value were included in the following geographic regions of the U.S. as of June 30, 2016 and
March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
March 31, 2016
|
|
|
|
Fair Value
|
|
|
Percentage
of Total
Investments
|
|
|
Fair Value
|
|
|
Percentage
of Total
Investments
|
|
Northeast
|
|
$
|
169,876
|
|
|
|
34.6
|
%
|
|
$
|
183,265
|
|
|
|
37.6
|
%
|
South
|
|
|
136,603
|
|
|
|
27.8
|
|
|
|
129,934
|
|
|
|
26.6
|
|
West
|
|
|
123,289
|
|
|
|
25.1
|
|
|
|
124,713
|
|
|
|
25.6
|
|
Midwest
|
|
|
61,213
|
|
|
|
12.5
|
|
|
|
49,744
|
|
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
490,981
|
|
|
|
100.0
|
%
|
|
$
|
487,656
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The geographic region indicates the location of the headquarters for our portfolio companies. A portfolio company may have
additional business locations in other geographic regions.
23
Investment Principal Repayments
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments,
as of June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
For the remaining nine months ending March 31:
|
|
2017
|
|
$
|
22,160
|
|
For the fiscal years ending March 31:
|
|
2018
|
|
|
76,326
|
|
|
|
2019
|
|
|
81,681
|
|
|
|
2020
|
|
|
101,108
|
|
|
|
2021
|
|
|
75,515
|
|
|
|
Thereafter
|
|
|
18,600
|
|
|
|
|
|
|
|
|
|
|
Total contractual repayments
|
|
$
|
375,390
|
|
|
|
Investments in equity securities
|
|
|
146,973
|
|
|
|
|
|
|
|
|
|
|
Total cost basis of investments held as of
June 30, 2016:
|
|
$
|
522,363
|
|
|
|
|
|
|
|
|
Receivables from Portfolio Companies
Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies. Such receivables, net of any allowance
for uncollectible receivables, are included in Other assets on our accompanying
Consolidated Statements of Assets and Liabilities
. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable
balance becomes 90 days or more past due or if it is determined, based upon managements judgment, that the portfolio company is unable to pay its obligations. We write off accounts receivable when collection efforts have been exhausted and the
receivables are deemed uncollectible. As of June 30, 2016 and March 31, 2016, we had gross receivables from portfolio companies of $0.9 million and $1.0 million, respectively. The allowance for uncollectible receivables was $0.4 million as
of both June 30, 2016 and March 31, 2016
.
NOTE 4. RELATED PARTY TRANSACTIONS
Transactions with the Adviser
We pay the Adviser certain
fees as compensation for its services, such fees consisting of a base management fee and an incentive fee, as provided for in the Advisory Agreement, and a loan servicing fee for the Advisers role as servicer pursuant to our Credit Facility,
each as described below. On July 12, 2016, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, approved the annual renewal of the Advisory Agreement
through August 31, 2017.
Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Brubaker (our vice
chairman and chief operating officer) serve as directors and executive officers of the Adviser, which is 100% indirectly owned and controlled by Mr. Gladstone. David Dullum (our president) is also an executive managing director of the Adviser.
24
The following table summarizes the base management fees, loan servicing fees, incentive fees, and associated
voluntary, non-contractual and irrevocable credits reflected in our accompanying
Consolidated Statements of Operations
:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Average total assets subject to base management
fee
(A)
|
|
$
|
501,800
|
|
|
$
|
490,600
|
|
Multiplied by prorated annual base management fee of 2.0%
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
Base management fee
(B)
|
|
|
2,509
|
|
|
|
2,453
|
|
Credits to fees from Adviser -
other
(B)
|
|
|
(837
|
)
|
|
|
(845
|
)
|
|
|
|
|
|
|
|
|
|
Net base management fee
|
|
$
|
1,672
|
|
|
$
|
1,608
|
|
|
|
|
|
|
|
|
|
|
Loan servicing fee
(B)
|
|
$
|
1,681
|
|
|
$
|
1,559
|
|
Credits to base management fee - loan servicing
fee
(B)
|
|
|
(1,681
|
)
|
|
|
(1,559
|
)
|
|
|
|
|
|
|
|
|
|
Net loan servicing fee
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Incentive fee
(B)
|
|
$
|
1,700
|
|
|
$
|
1,291
|
|
Credits to fees from Adviser -
other
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net incentive fee
|
|
$
|
1,700
|
|
|
$
|
1,291
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued
at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
|
(B)
|
Reflected as a line item on our accompanying
Consolidated Statement of Operations
.
|
Base Management
Fee
The base management fee is payable quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 2.0%, computed
on the basis of the value of our average gross assets at the end of the two most recently completed quarters (inclusive of the current quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash
or cash equivalents resulting from borrowings, and adjusted appropriately for any share issuances or repurchases during the period.
Additionally,
pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under certain agreements and may receive
fees for services other than managerial assistance. Such services may include, but are not limited to: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties;
(ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated
third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. The Adviser voluntarily, unconditionally,
and irrevocably credits 100% of these fees against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, totaling $53
and $56 for the three month periods ended June 30, 2016 and 2015, respectively, was retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser and primarily for the valuation of portfolio
companies.
Loan Servicing Fee
The Adviser also
services the loans held by our wholly-owned subsidiary, Business Investment (the borrower under our Credit Facility), in return for which the Adviser receives a 2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged
under our Credit Facility. Since Business Investment is a consolidated subsidiary of ours, coupled with the fact that the total base management fee paid to the Adviser pursuant to the Advisory Agreement cannot exceed 2.0% of total assets (as reduced
by cash and cash equivalents pledged to creditors) during any given calendar year, we treat payment of the loan servicing fee pursuant to our Credit Facility as a pre-payment of the base management fee under the Advisory Agreement. Accordingly,
these loan servicing fees are 100% voluntarily, unconditionally, and irrevocably credited back to us by the Adviser.
Incentive Fee
The incentive fee payable to the Adviser under our Advisory Agreement consists of two parts: an income-based incentive fee and a capital gains-based incentive
fee.
25
The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect
to any incentive fee) exceeds 1.75% of our net assets, adjusted appropriately for any share issuances or repurchases during the period (the Hurdle Rate). The income-based incentive fee with respect to our pre-incentive fee net investment
income is payable quarterly to the Adviser and is computed as follows:
|
|
|
no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the Hurdle Rate (7.0% annualized);
|
|
|
|
100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the Hurdle Rate but is less than 2.1875% of our net assets,
adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter (8.75% annualized); and
|
|
|
|
20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar
quarter (8.75% annualized).
|
The second part of the incentive fee is a capital gains-based incentive fee that is determined and payable in
arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date), and equals 20.0% of our realized capital gains, less any realized capital losses and unrealized depreciation, calculated as of the
end of the preceding calendar year. The capital gains-based incentive fee payable to the Adviser is calculated based on (i) cumulative aggregate realized capital gains since our inception, less (ii) cumulative aggregate realized capital
losses since our inception, less (iii) the entire portfolios aggregate unrealized capital depreciation, if any, as of the date of the calculation. If this number is positive at the applicable calculation date, then the capital gains-based
incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. For calculation purposes, cumulative aggregate realized capital gains,
if any, equals the sum of the excess between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the deficit between the net
sales price of each investment, when sold, and the original cost of such investment since our inception. The entire portfolios aggregate unrealized capital depreciation, if any, equals the sum of deficit between the fair value of each
investment security as of the applicable calculation date and the original cost of such investment security. We have not incurred capital gains-based incentive fees from inception through June 30, 2016, as cumulative net unrealized capital
depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.
Additionally, in accordance with GAAP, a capital
gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the
aggregate cumulative unrealized capital appreciation. If such amount is positive at the end of a reporting period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual
capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such period. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital
appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that any such unrealized capital appreciation will be realized in the future.
There has been no GAAP accrual recorded for a capital gains-based incentive fee since our inception through June 30, 2016.
Transactions with the
Administrator
We pay the Administrator pursuant to the Administration Agreement for our allocable portion of the Administrators expenses
incurred while performing services to us, which are primarily rent as well as salaries and benefits expenses of the Administrators employees, including, but not limited to, our chief financial officer and treasurer, chief valuation officer,
chief compliance officer and general counsel and secretary (who also serves as the Administrators president) and their respective staffs. Prior to July 1, 2014, our allocable portion of the expenses was generally derived by multiplying
that portion of the Administrators expenses allocable to all funds managed by the Adviser and serviced by the Administrator by the percentage of our total assets at the beginning of each quarter in comparison to the total assets at the
beginning of each quarter of all funds managed by the Adviser and serviced by the Administrator.
Effective July 1, 2014, our allocable portion of
the Administrators expenses are generally derived by multiplying the Administrators total expenses by the approximate percentage of time during the current quarter the Administrators employees performed services for us in relation
to their time spent performing services for all companies serviced by the Administrator. These administrative fees are accrued at the end of the quarter when the services are performed and recorded on our accompanying
Consolidated Statements of
Operations
and generally paid the following quarter. On July 12, 2016, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2017.
26
Other Transactions
Gladstone Securities, LLC (Gladstone Securities), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and
insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence
services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the voluntary, unconditional, and
irrevocable credits against the base management fee. The fees received by Gladstone Securities from portfolio companies during the three month periods ended June 30, 2016 and 2015 totaled $0.3 million and $0.2 million, respectively.
Related Party Fees Due
Amounts due to related parties on
our accompanying
Consolidated Statements of Assets and Liabilities
were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
As of March 31
|
|
|
|
2016
|
|
|
2016
|
|
Base management and loan servicing fee due to Adviser, net of credits
|
|
$
|
395
|
|
|
$
|
647
|
|
Incentive fee due to Adviser
|
|
|
1,700
|
|
|
|
1,224
|
|
Other due to Adviser
|
|
|
16
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
Total fees due to Adviser
|
|
$
|
2,111
|
|
|
$
|
1,912
|
|
Fee due to Administrator
|
|
$
|
299
|
|
|
$
|
311
|
|
|
|
|
|
|
|
|
|
|
Total related party fees due
|
|
$
|
2,410
|
|
|
$
|
2,223
|
|
|
|
|
|
|
|
|
|
|
Net co-investment expenses payable to Gladstone Capital Corporation, one of our affiliated funds, (for reimbursement
purposes) and payables to other affiliates totaled $56 and $19 as of June 30, 2016 and March 31, 2016, respectively. These amounts were paid in full in the quarter subsequent to being incurred and have been included in Other liabilities on
the accompanying
Consolidated Statements of Assets and Liabilities
as of June 30, 2016 and March 31, 2016, respectively
.
NOTE 5. BORROWINGS
Revolving Line of Credit
On June 26, 2014, we, through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 1 to the Fifth Amended and
Restated Credit Agreement originally entered into on April 30, 2013. The revolving period was extended to June 26, 2017, and if not renewed or extended by June 26, 2017, all principal and interest will be due and payable on or before
June 26, 2019 (two years after the revolving period end date). Subject to certain terms and conditions, our Credit Facility can be expanded to a total facility amount of $250.0 million, through additional commitments of existing or new
committed lenders. On September 19, 2014, we further increased our borrowing capacity under our Credit Facility to $185.0 million by entering into Joinder Agreements pursuant to our Credit Facility. Advances under our Credit Facility generally
bear interest at 30-day London Interbank Offered Rate (LIBOR), plus 3.25% per annum, and our Credit Facility includes a fee of 0.50% on undrawn amounts. Once the revolving period ends, the interest rate margin increases to 3.75% for
the period from June 26, 2017 to June 26, 2018, and further increases to 4.25% through maturity.
27
The following tables summarize noteworthy information related to our Credit Facility:
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
As of March 31,
|
|
|
|
2016
|
|
|
2016
|
|
Commitment amount
|
|
$
|
185,000
|
|
|
$
|
185,000
|
|
Borrowings outstanding at cost
|
|
|
79,600
|
|
|
|
95,000
|
|
Availability
(A)
|
|
|
105,400
|
|
|
|
90,000
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted average borrowings outstanding
|
|
$
|
79,876
|
|
|
$
|
103,142
|
|
Effective interest rate
(B)
|
|
|
4.4
|
%
|
|
|
3.9
|
%
|
Commitment (unused) fees incurred
|
|
$
|
133
|
|
|
$
|
102
|
|
(A)
|
Availability is subject to various constraints imposed under our Credit Facility, which equated to an adjusted availability of $62.2 million and $47.1 million as of June 30, 2016 and March 31, 2016,
respectively.
|
(B)
|
Excludes the impact of deferred financing fees and includes weighted average unused commitment fees.
|
Among
other things, our Credit Facility contains a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatory redeemable term preferred stock) of $170 million plus 50% of all
equity and subordinated debt raised minus any equity or subordinated debt redeemed or retired after June 26, 2014, which equates to $224.9 million as of June 30, 2016, (ii) asset coverage with respect to senior securities representing
indebtedness of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of June 30, 2016, and as defined in the performance guaranty of our Credit
Facility, we had a net worth of $415.6 million, an asset coverage ratio on our senior securities representing indebtedness of 574.4%, calculated in compliance with the requirements of Section 18 of the 1940 Act, and an active status as a BDC
and RIC. Our Credit Facility requires a minimum of 12 obligors in the borrowing base and, as of June 30, 2016, we had 29 obligors. As of June 30, 2016, we were in compliance with all covenants under our Credit Facility.
Pursuant to the terms of our Credit Facility, in July 2013, we entered into an interest rate cap agreement with KeyBank National Association effective October
2013 for a notional amount of $45.0 million. The interest rate cap agreement expired in April 2016. Prior to its expiration in April 2016, the agreement effectively limited the interest rate on a portion of our borrowings under our Credit Facility.
We incurred a premium fee of $75 in conjunction with this agreement, which was recorded in Realized loss on other on our accompanying
Consolidated Statements of Operations
during the three months ended June 30, 2016. As of March 31,
2016, the fair value of our interest rate cap agreement was $0.
Secured Borrowing
In August 2012, we entered into a participation agreement with a third-party related to $5.0 million of our secured second lien term debt investment in Ginsey
Home Solutions, Inc. (Ginsey). In May 2014, we amended the agreement with the third-party to include an additional $0.1 million. ASC Topic 860,
Transfers and Servicing
requires us to treat the participation as a
financing-type transaction. Specifically, the third-party has a senior claim to our remaining investment in the event of default by Ginsey which, in part, resulted in the loan participation bearing a rate of interest lower than the contractual rate
established at origination. Therefore, our accompanying
Consolidated Statements of Assets and Liabilities
reflects the entire secured second lien term debt investment in Ginsey and a corresponding $5.1 million secured borrowing liability. The
secured borrowing has a stated fixed interest rate of 7.0% and a maturity date of January 3, 2021.
Fair Value
We elected to apply the fair value option of ASC Topic 825,
Financial Instruments
, to our Credit Facility, which was consistent with our
application of ASC 820 to our investments. Generally, the fair value of our Credit Facility is determined using a yield analysis which includes a DCF calculation and also takes into account the Valuation Teams own assumptions, including, but
not limited to, the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At each of June 30, 2016 and March 31, 2016, the discount rate used to
determine the fair value of our Credit Facility was 30-day LIBOR, plus 3.25% per annum, plus a 0.50% unused fee. Generally, an increase or decrease in the discount rate used in the DCF calculation may result in a corresponding decrease or
increase, respectively, in the fair value of our Credit Facility. At each of June 30, 2016 and March 31, 2016, our Credit Facility was valued using Level 3 inputs and any changes in its fair value are recorded in Net unrealized
depreciation (appreciation) of other on our accompanying
Consolidated Statements of Operations
.
28
The following tables present our Credit Facility carried at fair value as of June 30, 2016 and
March 31, 2016, by caption on our accompanying
Consolidated Statements of Assets and Liabilities
for Level 3 of the hierarchy established by ASC 820 and a roll-forward of the changes in fair value during the three months ended
June 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
Level 3 Borrowings
|
|
|
|
Recurring Fair Value Measurements
Reported in
Consolidated
Statements of Assets and Liabilities
Using
Significant
Unobservable Inputs (Level 3)
|
|
|
|
June 30, 2016
|
|
|
March 31, 2016
|
|
Credit Facility
|
|
$
|
79,600
|
|
|
$
|
95,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements of Borrowings Using
Significant Unobservable Inputs (Level 3)
|
|
Reported in
Consolidated Statements
of Assets and Liabilities
|
|
|
|
Credit
Facility
|
|
Three months ended June 30, 2016:
|
|
|
|
|
Fair value at March 31, 2016
|
|
$
|
95,000
|
|
Borrowings
|
|
|
31,100
|
|
Repayments
|
|
|
(46,500
|
)
|
|
|
|
|
|
Fair value at June 30, 2016
|
|
$
|
79,600
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements of Borrowings Using
Significant Unobservable Inputs (Level 3)
|
|
Reported in
Consolidated Statements
of Assets and Liabilities
|
|
|
|
Credit
Facility
|
|
Three months ended June 30, 2015:
|
|
|
|
|
Fair value at March 31, 2015
|
|
$
|
118,800
|
|
Borrowings
|
|
|
38,500
|
|
Repayments
|
|
|
(67,550
|
)
|
|
|
|
|
|
Fair value at June 30, 2015
|
|
$
|
89,750
|
|
|
|
|
|
|
The fair value of the collateral under our Credit Facility was $458.4 million and $461.4 million as of June 30, 2016 and
March 31, 2016, respectively.
29
NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK
The following tables summarize our 7.125% Series A Cumulative Term Preferred Stock (our Series A Term Preferred Stock or Series A),
6.75% Series B Cumulative Term Preferred Stock (our Series B Term Preferred Stock or Series B), and our 6.50% Series C Cumulative Term Preferred Stock (our Series C Term Preferred Stock or Series C)
outstanding as of June 30, 2016 and March 31, 2016:
As of June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
of
Term
Preferred
Stock
|
|
Ticker
Symbol
|
|
Date
Issued
|
|
Redemption
Date
(A)
|
|
Interest
Rate
|
|
Shares
Outstanding
|
|
Liquidation
Preference
per Share
|
|
Total
Liquidation
Preference
|
Series A
|
|
GAINP
|
|
March 6,
2012
|
|
February 28,
2017
|
|
7.125%
|
|
1,600,000
|
|
$25.00
|
|
$40,000
|
Series B
|
|
GAINO
|
|
November 13,
2014
|
|
December 31,
2021
|
|
6.750%
|
|
1,656,000
|
|
25.00
|
|
41,400
|
Series C
|
|
GAINN
|
|
May 12,
2015
|
|
May 31,
2022
|
|
6.500%
|
|
1,610,000
|
|
25.00
|
|
40,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term preferred stock,
gross
(B)
|
|
4,866,000
|
|
$25.00
|
|
$121,650
|
Less: Discounts
|
|
|
|
(2,967)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term preferred stock,
net
(C)
|
|
|
|
$118,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
of
Term
Preferred
Stock
|
|
Ticker
Symbol
|
|
Date
Issued
|
|
Redemption
Date
(A)
|
|
Interest
Rate
|
|
Shares
Outstanding
|
|
Liquidation
Preference
per Share
|
|
Total
Liquidation
Preference
|
Series A
|
|
GAINP
|
|
March 6,
2012
|
|
February 28,
2017
|
|
7.125%
|
|
1,600,000
|
|
$25.00
|
|
$40,000
|
Series B
|
|
GAINO
|
|
November 13,
2014
|
|
December 31,
2021
|
|
6.750%
|
|
1,656,000
|
|
25.00
|
|
41,400
|
Series C
|
|
GAINN
|
|
May 12,
2015
|
|
May 31,
2022
|
|
6.500%
|
|
1,610,000
|
|
25.00
|
|
40,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term preferred stock,
gross
(B)
|
|
4,866,000
|
|
$25.00
|
|
$121,650
|
Less: Discounts
|
|
|
|
(3,185)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term preferred stock,
net
(C)
|
|
|
|
$118,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Represents the mandatory redemption date for each of our series of mandatorily redeemable preferred stock. The optional redemption dates for each of our series of
mandatorily redeemable preferred stock are February 28, 2016 for our Series A Term Preferred Stock, December 31, 2017 for our Series B Term Preferred Stock, and May 31, 2018 for our Series C Term Preferred Stock.
|
(B)
|
As of June 30, 2016 and March 31, 2016, the asset coverage on our senior securities that are stock calculated pursuant to Section 18 of the 1940 Act
was 239.7% and 221.4%, respectively.
|
(C)
|
Reflected as a line item on our accompanying
Consolidated Statement of Assets and Liabilities
pursuant to the adoption of ASU 2015-03. Refer to Note 2
Summary of Significant Accounting Policies
Reclassifications
for additional information regarding the adoption of ASU 2015-03.
|
30
The following tables summarize dividends declared by our Board of Directors and paid by us on each of our series
of mandatorily redeemable preferred stock during the three months ended June 30, 2016 and 2015:
For the Three Months Ended June 30,
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Dividend
per Series A
Term
Preferred
Share
|
|
|
Dividend
per Series B
Term
Preferred
Share
|
|
|
Dividend
per Series C
Term
Preferred
Share
|
|
April 12, 2016
|
|
April 22, 2016
|
|
May 2, 2016
|
|
$
|
0.1484375
|
|
|
$
|
0.140625
|
|
|
$
|
0.135417
|
|
April 12, 2016
|
|
May 19, 2016
|
|
May 31, 2016
|
|
|
0.1484375
|
|
|
|
0.140625
|
|
|
|
0.135417
|
|
April 12, 2016
|
|
June 17, 2016
|
|
June 30, 2016
|
|
|
0.1484375
|
|
|
|
0.140625
|
|
|
|
0.135417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.4453125
|
|
|
$
|
0.421875
|
|
|
$
|
0.406251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Dividend
per Series A
Term
Preferred
Share
|
|
|
Dividend
per Series B
Term
Preferred
Share
|
|
|
Dividend
per Series C
Term
Preferred
Share
|
|
April 14, 2015
|
|
April 24, 2015
|
|
May 5, 2015
|
|
$
|
0.1484375
|
|
|
$
|
0.140625
|
|
|
$
|
|
|
April 14, 2015
|
|
May 19, 2015
|
|
May 29, 2015
|
|
|
0.1484375
|
|
|
|
0.140625
|
|
|
|
|
|
April 14, 2015
|
|
June 19, 2015
|
|
June 30, 2015
|
|
|
0.1484375
|
|
|
|
0.140625
|
|
|
|
|
|
May 14,
2015
(A)
|
|
June 19, 2015
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
0.221181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.4453125
|
|
|
$
|
0.421875
|
|
|
$
|
0.221181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Represents a combined dividend for a prorated month of May 2015, based upon the issuance date of our Series C Term Preferred Stock, combined with a full
month of June 2015.
|
The tax character of dividends paid by us to our preferred stockholders generally constitute ordinary income to the
extent of our current and accumulated earnings and profits.
In accordance with ASC Topic 480,
Distinguishing Liabilities from Equity
,
mandatorily redeemable financial instruments should be classified as liabilities in the balance sheet and we have recorded our mandatorily redeemable preferred stock at cost as of June 30, 2016 and March 31, 2016. The related dividend
payments to preferred stockholders are treated as dividend expense on our accompanying
Consolidated Statements of Operations
at the ex-dividend date.
The following table summarizes the fair value of each of our series of mandatorily redeemable preferred stock based on the last reported closing sale price as
of June 30, 2016 and March 31, 2016, each of which we consider to be a Level 1 input within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
|
|
|
|
June 30, 2016
|
|
|
March 31, 2016
|
|
Series A Term Preferred Stock
|
|
$
|
40,656
|
|
|
$
|
40,944
|
|
Series B Term Preferred Stock
|
|
|
41,963
|
|
|
|
40,738
|
|
Series C Term Preferred Stock
|
|
|
40,234
|
|
|
|
38,849
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
122,853
|
|
|
$
|
120,531
|
|
|
|
|
|
|
|
|
|
|
NOTE 7. REGISTRATION STATEMENT AND COMMON EQUITY OFFERINGS
Registration Statement
On June 16, 2015, we filed a
registration statement on Form N-2 (File No. 333-204996) with the SEC and subsequently filed a Pre-Effective Amendment No. 1 to the registration statement on July 28, 2015, which the SEC declared effective on July 29, 2015. On
June 8, 2016, we filed Post-Effective Amendment No. 1 to the registration statement, which the SEC declared effective on July 28, 2016. The registration statement permits us to issue, through one or more transactions, up to an
aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common or preferred stock, including through concurrent, separate offerings of such securities. No
securities have been issued to date under the registration statement.
31
NOTE 8. NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER WEIGHTED AVERAGE COMMON SHARE
The following table sets forth the computation of basic and diluted net increase (decrease) in net assets resulting from operations per weighted
average common share for the three months ended June 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Numerator: net increase in net assets resulting from operations
|
|
$
|
24,534
|
|
|
$
|
8,559
|
|
Denominator: basic and diluted weighted average common shares
|
|
|
30,270,958
|
|
|
|
30,260,079
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net increase in net assets resulting from operations per weighted average
common share
|
|
$
|
0.81
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS
To qualify for treatment as a RIC under Subchapter M of the Code, we must generally distribute to our stockholders, for each taxable year, at least 90% of our
ordinary income plus the excess of our net short-term capital gains over net long-term capital losses (Investment Company Taxable Income). The amount to be paid out as distributions to our common stockholders is determined by our Board
of Directors quarterly and is based on managements estimate of Investment Company Taxable Income. Based on that estimate, our Board of Directors declares three monthly distributions to common stockholders each quarter.
The federal income tax characteristics of all distributions (including preferred stock dividends) will be reported to stockholders on Internal Revenue Service
Form 1099 after the end of each calendar year.
We paid the following monthly distributions to our common stockholders for the three months ended
June 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year
|
|
Declaration Date
|
|
|
Record Date
|
|
Payment Date
|
|
Distribution
per
Common
Share
|
|
2017
|
|
|
April 12, 2016
|
|
|
April 22, 2016
|
|
May 2, 2016
|
|
$
|
0.0625
|
|
|
|
|
April 12, 2016
|
|
|
May 19, 2016
|
|
May 31, 2016
|
|
|
0.0625
|
|
|
|
|
April 12, 2016
|
|
|
June 17, 2016
|
|
June 30, 2016
|
|
|
0.0625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2016:
|
|
$
|
0.1875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year
|
|
Declaration Date
|
|
|
Record Date
|
|
Payment Date
|
|
Distribution
per
Common
Share
|
|
2016
|
|
|
April 14, 2015
|
|
|
April 24, 2015
|
|
May 5, 2015
|
|
$
|
0.0625
|
|
|
|
|
April 14, 2015
|
|
|
May 19, 2015
|
|
May 29, 2015
|
|
|
0.0625
|
|
|
|
|
April 14, 2015
|
|
|
June 19, 2015
|
|
June 30, 2015
|
|
|
0.0625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2015:
|
|
$
|
0.1875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate distributions to our common stockholders declared quarterly and paid were $5.7 million for both the three months
ended June 30, 2016 and 2015 and were declared based on estimates of Investment Company Taxable Income for each respective fiscal year. We determine the tax characterization of distributions to our common stockholders as of the end of our
fiscal year, based upon our taxable income for the full year and distributions paid during the full year. Therefore, a determination of tax characterization made on a quarterly basis may not be representative of the actual tax characterization of
distributions for the full year. If we determined the tax characterization of our distributions as of June 30, 2016, 100% would be from ordinary income and 0% would be a return of capital. For the three months ended June 30, 2016, we
recorded $0.1 million of net estimated adjustments for permanent book-tax differences to reflect tax character which decreased Capital in excess of par value by $115, increased Accumulated net realized gain (loss) by $74 and increased Net investment
income in excess of distributions by $40 on our accompanying
Consolidated Statement of Assets and Liabilities
. For the fiscal year ended March 31, 2016, Investment Company Taxable Income exceeded distributions declared and paid, and, in
accordance with Section 855(a) of the Code, we elected to treat $6.9 million of the first distributions paid to common stockholders in fiscal year 2017, as having been paid in the prior year.
32
NOTE 10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are party to certain legal
proceedings incidental to the normal course of our business. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both
probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our
financial condition, results of operation or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both probable and estimable and therefore, as of June 30, 2016 and March 31, 2016, we had
no established reserves for such loss contingencies.
Escrow Holdbacks
From time to time, we will enter into arrangements relating to exits of certain investments whereby specific amounts of the proceeds are held in escrow to be
used to satisfy potential obligations, as stipulated in the sales agreements. We record escrow amounts in Restricted cash and cash equivalents, if received in cash but subject to potential obligations, or as escrow receivables in Other assets, net,
if not yet received in cash, on our accompanying
Consolidated Statements of Assets and Liabilities
. We establish a reserve against the escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will
not ultimately be released or received at the end of the escrow period. Reserves against escrow amounts were $0.5 million as of June 30, 2016. There were no aggregate reserves recorded against escrow amounts as of March 31, 2016.
Financial Commitments and Obligations
We have lines of
credit and other uncalled capital commitments to certain of our portfolio companies that have not been fully drawn. Since these lines of credit and other uncalled capital commitments have expiration dates and we expect many will never be fully
drawn, the total line of credit and other uncalled capital commitment amounts do not necessarily represent future cash requirements. In February 2015, we executed a capital call commitment with Tread and its senior credit facility lender, which
expires in February 2018. Under the terms of the agreement, we may be required to fund additional capital up to $10.0 million in Tread, with such commitment limited at all times to the actual amount outstanding under Treads senior credit
facility. The actual amount outstanding under Treads senior credit facility as of June 30, 2016 and March 31, 2016 was $3.3 million and $5.1 million, respectively. We estimate the fair value of the combined unused line of credit and
other uncalled capital commitments as of June 30, 2016 and March 31, 2016 to be immaterial.
In addition to the lines of credit and other
uncalled capital commitments to our portfolio companies, we have also extended certain guaranties on behalf of one of our portfolio companies. During the three months ended June 30, 2016 and 2015, we have not been required to make any payments
on any of the guaranties, and we consider the credit risks to be remote and the fair value of the guaranties as of June 30, 2016 and March 31, 2016 to be immaterial.
33
As of June 30, 2016, the following guaranties were outstanding:
|
|
|
In February 2010, we executed a guaranty of a wholesale financing facility agreement (the Floor Plan Facility) between Agricredit Acceptance, LLC (Agricredit) and Country Club Enterprises, LLC
(CCE). The Floor Plan Facility provides CCE with financing of up to $2.0 million to bridge the time and cash flow gap between the order dates and delivery dates of golf carts to customers. The guaranty was renewed in February of each
subsequent year through February 2016 and expires in February 2017, unless it is renewed again by us, CCE and Agricredit.
|
|
|
|
In April 2010, we executed a guaranty of vendor recourse for individual customer transactions (the Recourse Facility) between Wells Fargo Financial Leasing, Inc. and CCE. The Recourse Facility provides CCE
with the ability to provide vendor recourse up to a limit of $0.2 million on transactions with long-time customers who lack the financial history to qualify for third-party financing. These individual transactions have terms to maturity that expire
in October 2016.
|
The following table summarizes the principal balances of unused line of credit and other uncalled capital commitments and
guaranties as of June 30, 2016 and March 31, 2016, which are not reflected as liabilities in the accompanying
Consolidated Statements of Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
March 31, 2016
|
|
Unused line of credit and other uncalled capital commitments
|
|
$
|
6,868
|
|
|
$
|
10,564
|
|
Guaranties
|
|
|
2,211
|
|
|
|
2,279
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,079
|
|
|
$
|
12,843
|
|
|
|
|
|
|
|
|
|
|
34
NOTE 11. FINANCIAL HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Per Common Share Data:
|
|
|
|
|
|
|
|
|
Net asset value at beginning of
period
(A)
|
|
$
|
9.22
|
|
|
$
|
9.18
|
|
Income from investment
operations
(B)
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.23
|
|
|
|
0.17
|
|
Net realized gain on sale of investments and other
|
|
|
0.61
|
|
|
|
0.01
|
|
Net unrealized (depreciation) appreciation of investments and other
|
|
|
(0.03
|
)
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
Total from investment operations
|
|
|
0.81
|
|
|
|
0.29
|
|
Effect of equity capital
activity
(B)
|
|
|
|
|
|
|
|
|
Cash distributions to common
stockholders
(C)
|
|
|
(0.19
|
)
|
|
|
(0.19
|
)
|
Shelf registration offering costs
|
|
|
|
|
|
|
(0.01
|
)
|
Net dilutive effect of equity
offering
(D)
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Total from equity capital activity
|
|
|
(0.19
|
)
|
|
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
Net asset value at end of period
(A)
|
|
$
|
9.84
|
|
|
$
|
9.24
|
|
|
|
|
|
|
|
|
|
|
Per common share market value at beginning of period
|
|
$
|
7.02
|
|
|
$
|
7.40
|
|
Per common share market value at end of period
|
|
|
7.16
|
|
|
|
7.95
|
|
Total investment return
(E)
|
|
|
4.75
|
%
|
|
|
10.07
|
%
|
Common stock outstanding at end of
period
(A)
|
|
|
30,270,958
|
|
|
|
30,270,958
|
|
|
|
|
Statement of Assets and Liabilities Data
:
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
297,880
|
|
|
$
|
279,754
|
|
Average net assets
(F)
|
|
|
285,546
|
|
|
|
278,746
|
|
|
|
|
Senior Securities Data
:
|
|
|
|
|
|
|
|
|
Total borrowings, at cost
|
|
$
|
84,696
|
|
|
$
|
94,846
|
|
Mandatorily redeemable preferred stock
|
|
|
121,650
|
|
|
|
121,650
|
|
|
|
|
Ratios/Supplemental Data:
|
|
|
|
|
|
|
|
|
Ratio of net expenses to average net assets annualized
(G)
|
|
|
10.62
|
%
|
|
|
10.82
|
%
|
Ratio of net investment income to average net assets annualized
(H)
|
|
|
9.54
|
|
|
|
7.41
|
|
(A)
|
Based on actual common shares outstanding at the end of the corresponding period.
|
(B)
|
Based on weighted average basic common share data for the corresponding period.
|
(C)
|
The tax character of distributions is determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP.
|
(D)
|
During the three months ended June 30, 2015, the dilution is the result of issuing common shares in April 2015 at a price below the then current NAV per share.
|
(E)
|
Total return equals the change in the market value of our common stock from the beginning of the period, taking into account dividends reinvested in accordance with the terms of our dividend reinvestment plan. Total
return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, please refer to Note 9
Distributions to
Common Stockholders
.
|
(F)
|
Calculated using the average balance of net assets at the end of each month of the reporting period.
|
(G)
|
Ratio of net expenses to average net assets is computed using total expenses, net of any voluntary, unconditional, and irrevocable credits of fees from the Adviser. Had we not received any voluntary, unconditional, and
irrevocable credits of fees due to the Adviser, the ratio of expenses to average net assets annualized would have been 14.15% and 14.27% for the three months ended June 30, 2016 and 2015, respectively.
|
(H)
|
Had we not received any voluntary, unconditional, and irrevocable credits of fees from the Adviser, the ratio of net investment income to average net assets annualized would have been 6.02% and 3.96% for the
three months ended June 30, 2016 and 2015, respectively
|
35
NOTE 12. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES
In accordance with the SECs Regulation S-X, we do not consolidate portfolio company investments. Further, in accordance with ASC 946, we are precluded
from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated
subsidiaries.
We have one unconsolidated subsidiary, Galaxy Tool Holding Corporation (Galaxy), which met at least one of the significance
conditions under Rule 1-02(w) of the SECs Regulation S-X as of or during at least one of the three month periods ended June 30, 2016 and 2015. Accordingly, summarized, comparative financial information, pursuant to Rule 10-01(b) is
presented below for Galaxy, which is a designer and manufacturer of precision tools for the business jet industry and of injection and blow molds for the plastics industry.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
Income Statement
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
$
|
6,148
|
|
|
$
|
6,066
|
|
Gross profit
|
|
|
1,551
|
|
|
|
392
|
|
Net profit (loss)
|
|
|
604
|
|
|
|
(700
|
)
|
NOTE 13. SUBSEQUENT EVENTS
Distributions
In July 2016, our Board of Directors
declared the following monthly distributions to common stockholders and dividends to holders of our Series A Term Preferred Stock, Series B Term Preferred Stock and Series C Term Preferred Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Distribution
per
Common
Share
|
|
|
Dividend per
Series A
Term
Preferred
Share
|
|
|
Dividend per
Series B
Term
Preferred
Share
|
|
|
Dividend per
Series C
Term
Preferred
Share
|
|
July 22, 2016
|
|
August 2, 2016
|
|
$
|
0.0625
|
|
|
$
|
0.1484375
|
|
|
$
|
0.140625
|
|
|
$
|
0.135417
|
|
August 22, 2016
|
|
August 31, 2016
|
|
|
0.0625
|
|
|
|
0.1484375
|
|
|
|
0.140625
|
|
|
|
0.135417
|
|
September 21, 2016
|
|
September 30, 2016
|
|
|
0.0625
|
|
|
|
0.1484375
|
|
|
|
0.140625
|
|
|
|
0.135417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for the Quarter:
|
|
$
|
0.1875
|
|
|
$
|
0.4453125
|
|
|
$
|
0.421875
|
|
|
$
|
0.406251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36